I’ve been recruited to respond to my friend Pavlina’s appeal on behalf of modern monetary theory (MMT). There is no shortage of liberal, radical and leftyer-left economists who look askance at MMT. Their basic view could be summarized by adapting an apocryphal Samuel Johnson quote: “I have found a great deal of good and original matter in them; but what was good was not original, and what was original was not good.”

The good-but-not-original refers to MMT’s roots in Keynesian economics: You don’t have to believe MMT to see the value of higher deficits when we’re not at full employment. The original-but-not-good refers to disagreement over how much deficits can increase without negative consequences.

There is more to this economic-theory debate, though we lack the space here. For now, we turn to the politics.

Pavlina asserts that an ideology of fiscal rectitude, embodied in the How will we pay for it? mantra, places impossible barriers before progressive public spending initiatives. For a number of reasons, however, this isn’t quite right.

As she observes, “The government immediately ‘finds the money’ when the policy priority is an endless war, financial bailouts, billionaire tax cuts.” Quite so. The rectitude is selective, steered by broader reactionary or centrist ideologies.

There are a bunch of ways to justify additional public spending without recourse to MMT. The most obvious is borrowing. We fail to exploit such devices not because of fiscal rectitude, but because under capitalism the ruling class blocks spending of which it does not approve.

Republicans want to gut social spending across the board. Their massive tax cuts and endless wars prove they don’t care about deficits. Their attacks on public spending are deeply racist and gendered; fiscal rectitude is not at issue. By now their hypocrisy regarding the deficit is well recognized.

With Democrats it’s more complicated. The Clinton and Obama administrations were motivated by an ideology of fiscal rectitude, combined with political risk aversion and indulgence of well-heeled donors. This view lives on, as we learn from disappointing commitments for a return to PAYGO (pay as you go), under which you can’t propose legislation to spend any money without offsetting that spending by specifying cuts in other spending or tax increases. This political millstone tends to shut down progressive fiscal activism. As noted above, MMT economists are not alone in rejecting such a posture.

The political timidity of mainstream Democratic Party big shots can be attributed in part, sad to say, to The People. They like hearing about Medicare for All and other ambitious proposals, but they are easily frightened by talk of tax increases and other PAYGO provisions. They like tax cuts, however, notwithstanding the likelihood of higher resulting deficits. What’s in question here is not fiscal rectitude, but skepticism as to the merits of an expanded public sector.

The public’s aversion to such an expansion can be overcome by mobilization, not in support of any arcane economic theory, but on behalf of the nice things more debt would make possible: Medicare for All, free college, etc. The Democratic Party establishment is reluctant to mobilize anyone, since it fears any activism beyond exhortations to vote. Get out and vote, then shut up, stay home, and keep sending us money.

We won’t have nice things until people want them enough to struggle and pay for them, whether through higher taxes or some other trade-off.

Aha! MMTers might exclaim. Paying for stuff is an illusion. Government spending is “self-financing.”

This appeal should be understood as a political gambit. There is more to the story. If the economy is running at full capacity—all productive resources (workers, machines) are fully employed—then, to get more of one thing, you do have to have less of something else.

Now, we are seldom at full capacity, or full employment. So I and all left economists join with MMT in the notion that fiscal activism—more deficit spending—can bring us closer to full employment, with invaluable results.

But at some point, increased government spending runs up against that capacity constraint. If we are already at full employment, with full utilization of all productive resources, more deficit spending can result in undesirable inflation.

The above is, in fact, MMT doctrine, but often hard to find in their popular treatments. Even Pavlina’s dominant theme is that the U.S. government can spend as much as it wants. If only!

A story that appears to emphasize unlimited public spending, besides being fallacious, will impress most people as either crankish or arcane. It isn’t accepted by a wide spectrum of left-of-center, nonMMT thinkers. Any existing progressive government that comes to power under such delusions is bound to disappoint its constituents.

By means of increased public debt, we can expand public spending. In fact, we must. At the end of the day, however, a politically evasive monetary theory should not be the basis for a progressive movement.

demo-dude: An assertion, especially from an anonymous source, no matter how confident, is not an argument.

Sorry, MMT does not have a monopoly on advocacy of deficit spending. Sometimes MMT advocates like to counter-pose themselves to the worst of the other side, like a WWF match. Sorry, there are good left economists who favor more deficit spending who don't need MMT.

Your boilerplate on debt, banks, the Fed is irrelevant to the political debate.

Equation of my position with bank bailouts or killing the safety net is idiotic.

Cheers.

Posted by MaxSpeak on 2019-01-06 13:56:49

I said explicitly that MMT acknowledges resource constraints. My gripe is that they downplay it too much.

Posted by MaxSpeak on 2019-01-06 13:48:11

That's all well-taken, but it's usually easier to get more spending by borrowing than by goring somebody else's ox. In that respect I'm closer to Pavlina & co.

Posted by MaxSpeak on 2019-01-06 13:47:19

I think Sawicky misrepresents MMT, which as I understand it has always maintained that federal government spending is resource-restrained, not cash-restrained. Too bad it seems that "leftist" economists would rather bash MMT than teach it.

Posted by Carla on 2019-01-05 11:49:57

Wow, the second article on "Pay-Go" and not one mention of the THIRTY TWO MILLION DOLLARS AN HOUR the US spends on WAR! Pay-go is a perfect opportunity to lower the insanely bloated military budget and start funneling those TRILLIONS into building our nation instead of blowing other nations to smithereens. The economics of endless global invasions is our biggest issue, which wasn't mentioned in the articles, nor the comments. WE HAVE THE MONEY to be the best, most progressive nation in the world, but we allow the corporate war mongers to rule both parties, sucking tax dollars to blow innocent little children and their families to bits in other lands, which in turn makes us more enemies, which makes us spend more on weapons, which now includes militarizing SPACE! We need healthcare, not warfare. We need books, not bombs. We need bread, not bullets. We need infrastructure here, not 900 military bases around the world. The cost of one bomb could feed, clothe, and house people instead of turning them to meaty parts. If we'd have dropped 20 million dollars of food and medical supplies on Iraq instead of a trillion dollars worth of weapons, they really would have greeted us with flowers like Rumsfeld said, but instead, we've murdered over a million people and destroyed the cradle of civilization in the name of saving them. And that's just one nation! The answer to Pay-Go is simple. Stop the invasions, occupations, and close the 900 military bases.

Posted by dopfa on 2019-01-05 09:07:09

I think you're correct. Stephanie Kelton generally points to inflation as the limiting factor of spending. If I understand correctly, the idea is the government can of course spend infinity +1, but the government cannot exactly control how much those dollars are worth. If the government invests it wisely and we get an increase in real value (goods and services produced) it's good spending, and the deficit is no issue. If the government spends and there is no increase in goods and services of value, then we'd see inflation.

From this amateur commenter's perspective, the key to a strong economy has nothing to do with dollars. The key to a strong economy is that people are the value, and people must BE VALUED. If we can educate more efficiently, if we can use the dollars to move people into their most productive lifestyle, if we're all doing our best work and being valued for that work, then that value will be reflected in our currency. The dollars must be used as a tool to accomplish that.

Posted by dkt on 2019-01-05 08:42:58

Hi folks. Thanks for reading and writing.

GrkStav: My only point with the links is to establish that MMT is not universally supported across the left-of-center spectrum. Whether you like the critiques is beside the point.

Scott: (like your stuff, BTW) I get the bottom line. My point is that the emphasis in her piece as well as MMT popular discussion is on the suggested lack of limits on public spending. That last graph from Pavlina, now that you mention it, doesn't fit well with her main thesis, that the obstacle to an expansion of the public sector is "fiscal rectitude."

Dave: I tried to make clear that Pavlina and other MMT economists, as opposed to some amateur commenters, fully recognize limits to spending. The point is that the political MMT message buries that recognition. I've also made clear in all of my writing that the economy is not at full capacity now and more deficit spending would be helpful. As for when we have been at full capacity, as Dave implies, the correct answer is very seldom. The late 90s were as close as we've gotten in recent decades. In any case, that doesn't contradict anything I said.

Cheers.

Posted by MaxSpeak on 2019-01-05 08:29:39

Something has clearly gone wrong with this piece when it includes this sentence (and associated links):

"There is no shortage of liberal, radical and leftyer-left economists who look askance at MMT."

The link for "radical" "economists who look askance at MMT" is to a hatchet-job by Thomas I. Palley. That has go to be a 'cruel joke'.

The link for the "leftyer-left" is to Scott Ferguson's "Some Remarks on MMT & Marxism in Light of David Harvey’s 'Marx, Capital, and the Madness of Economic Reason'". There is no chance at all that Max B. Sawicky actually read the piece he linked to.

Posted by GrkStav on 2019-01-04 15:23:24

I'd recommend reading comprehension as the remedy for your doubts about MMT. Pavlina responds to your concerns. In fact, as someone who has read dozens, if not hundreds, of MMT publications, I can assert with confidence that MMT is not "politically evasive" in the least. Virtually all such publications address the inflation problem (which is what your "capacity" problem leads to). That you would even bring it up in the current context is just weird.

As for "a bunch of ways to justify additional public spending without recourse to MMT. The most obvious is borrowing."... again, bizarre! It's as though you have declared "there are a bunch of ways to explain falling objects without referring to gravity." MMT explains of what money is. What is it? It *is* debt!

You're very familiar with this if you have a bank account. That's your asset, but the bank's liability (i.e. debt). When you write a check, you're assigning a portion of the bank's debt to the payee. Currency is just checks made out to "cash" in fixed amounts, and appears on the books of our central bank, The Federal Reserve, as debt.

There is literally no limit to how big an IOU the Fed can write, too. That's just like saying there's no limit to the number of inches down at the Bureau of Weights and Measures. According to its own audit, the Fed issued $16 - $29 trillion in credit to the financial sector when its sub-prime mortgage / derivative frauds crashed the economy. For only $9 trillion, we could have paid off everyone's mortgage. Apparently bank bailouts are OK, but the health of the rest of the economy is optional.

So...why try to kill the social safety nets while saving the creditors? Two words: "Labor discipline." The population is on notice that they had better take whatever crappy job is on offer, or they will suffer the indignities of poverty, homelessness, and even starvation.

So...borrowing?! By all means! Issuing currency is borrowing! That *is* what it *is*! The dollars say so when they declare they are "Federal Reserve Notes"..."notes" being the legal term for IOU.

And if you really were concerned about this "debt"...how about going down to your bank and letting them know you want a smaller account, because you're worried about the bank's debt? Not very sensible, is it?

So...could we "borrow" as the bank does, and issue those checks for public goods and services? Obviously. Would this damage the economy? Until it comes closer to capacity, not likely. It might make life tougher for abusive employers, though (I'm looking at you, Walmart & Amazon!).

The political right's "two Santa Clauses" tactic--complaining as bitterly as possible about National 'Debt' (i.e. the amount of dollar financial assets out in the economy) when out of power, then enlarging it as much as possible when in power, to the benefit of their patrons...You're right about that.

But conventional economists (not MMT) need to justify their assertions with something other than a statement like "Well, the rest of the population believes in a geocentric solar system, so we must go along with that."

Give the track record of conventional economists--including no prediction of the Great Recession--I'd suggest at least a *little* humility here.

Posted by demockracy on 2019-01-04 14:42:13

He points out that Pavlina said the government can spend as much as it wants...but he ignores that she also admitted that too much spending can cause inflation. From the third-to-last paragraph in her piece:

"Even those who understand this often resist bold government action for fear of inflation. And while MMT agrees that inflation is a relevant worry, we can avoid the inflation trap by focusing on how the government spends rather than how much. So long as money put into the economy is mobilizing unemployed resources and satisyfing unmet basic needs, government spending can be done without causing inflation—and is, in fact, desperately needed."

Max admits that the economy is rarely at full capacity. I'm no economist, so I'd be interested to hear when was the last time that the economy was at full capacity. Running up against the capacity constraint doesn't seem to be very likely in the present day.

Pavlina's piece was comprehensive and really clarified this issue in a way I had never seen before. I bookmarked it and plan to refer to it often. Max's response unfortunately didn't really add much to the debate.

Posted by Dave on 2019-01-04 14:31:08

The piece to which this piece is in response, specifically addresses the alleged 'drawbacks' of the MMT approach.

The following is also internally contradictory:

"Now, we are seldom at full capacity, or full employment. So I and all left economists join with MMT in the notion that fiscal activism—more deficit spending—can bring us closer to full employment, with invaluable results.

But at some point, increased government spending runs up against that capacity constraint. If we are already at full employment, with full utilization of all productive resources, more deficit spending can result in undesirable inflation.

The above is, in fact, MMT doctrine, but often hard to find in their popular treatments. Even Pavlina’s dominant theme is that the U.S. government can spend as much as it wants. If only!

A story that appears to emphasize unlimited public spending, besides being fallacious, will impress most people as either crankish or arcane. It isn’t accepted by a wide spectrum of left-of-center, nonMMT thinkers. Any existing progressive government that comes to power under such delusions is bound to disappoint its constituents."

The "story" in question does *not* appear to emphasize unlimited public spending. It is a matter of actual logic that the issuer, the sole 'manufacturer', of US Dollars, the entity which quite literally wills US Dollars into existence, by "fiat" (via Congressional appropriation and authorization) has the literal capacity to "spend as much as IT wants". There's no "if only". It is true.

There are *no* delusions in the actual approach. The 'objection' or 'rejoinder' is to a mythical "popular treatment". By Max B. Sawisky's own admission the "undesirable inflation" result of effective demand expansion via increased Federal Government deficit spending (G>T) is highlighted as part of "MMT doctrine".

How is it intellectually honest and honorable to declare a macroeconomic approach/perspective (and its policy prescriptions) "a politically evasive monetary theory" and to insist that it "should not be the basis for a progressive movement" when it is irrefragably *not* politically evasive, at all? Are we to pretend that Stephanie Kelton did not serve as chief economist on the U.S. Senate Budget Committee with Bernie Sanders as its Chair? Has Max B. Sawicky forgotten somehow the Job Guarantee/Employment of Last Resort/Public Service Employment Guarantee scholarly work of Pavlina Tcherneva? Does he somehow not know of the policy proposals and policy briefs/analyses authored by Randy Wray? Or about the work of Scott Fullwiler?

Finally, what is the fascination with "increased public debt" as a way to "finance" increased federal government (deficit) spending? What is so special or sacred about matching dollar for dollar the amount of U.S. Govt deficit spending with US Treasury issued securities, which (by convention) add to the "public debt" even if they end up on the balance sheet of the Federal Reserve? If Federal Government deficit spending of the order desired by Max B. Sawicky and other left-of-center, non-MMT thinkers were 'financed' via Overt Monetary Financing OR via minting a Platinum Coin (and depositing it at the UST's account at the Fed) would that have any deleterious impact on anything of significance?

The above is meant to be in response to the author and not to Scott Fullwiler.

Posted by GrkStav on 2019-01-04 14:28:20

From Pavlina's piece in the last paragraph you are supposedly responding to, since you obviously missed what she called her BOTTOM LINE:

"The bottom line: How will you pay for it? is the wrong question to obsess over. The right question is the more difficult and important one about the impact of government spending on the economy. Did it generate income inequality? Did it cause inflation? Or did it help build an economy that works for all? MMT economists favor policies for shared prosperity, like a federal job guarantee, a Green New Deal, tuition-free college and Medicare for All. What are the real effects of these and other policies on the economy? Let’s have that debate."